WASHINGTON — Republicans are furious about changes to federal mortgage fees benefiting borrowers with lower credit scores.
Earlier this year, the Biden administration announced a new fee schedule for mortgage loans backed by the federal government. Fees went down for some borrowers with lower credit scores and went up for some with higher scores.
Senate Republicans led by Sen. Roger Marshall (R-Kan.) complained in a letter to the Federal Housing Finance Agency that the change will “enshrine a system that willfully-ignores the realities of creditworthiness in an effort to push Americans into homes they may be ill-suited to afford.”
The letter followed reports in conservative and right-wing media, including an incendiary segment on Tucker Carlson’s final Fox News broadcast, suggesting the Biden administration was gouging responsible borrowers in order to shower benefits on deadbeats.
“We are incentivizing bad behavior. We’re hurting the good people,” Carlson said, before noting that “Black Americans are the only racial group in this country with average credit scores of under 680.”
The criticism might give the impression that, as a result of the change, people with good credit will actually pay higher fees than people with bad credit, but that’s not the case. Though the change reduced fees for some borrowers with worse credit, any borrower with a lower credit score still has to pay more for the same loan than a borrower with higher credit.
“People are focused on the changes to the fees rather than the resulting fees,” said Michael Calhoun, president of the Center for Responsible Lending, a Durham, North Carolina-based nonprofit research and policy organization.
Calhoun noted that borrowers making low down payments face even higher costs, because they’re required to pay for private mortgage insurance if their down payments amount to less than 20% of the value of their home purchase — a fact Republicans have ignored.
“They’re tossing things up against the wall and when you dig into it, there’s no there there,” Calhoun said. “In fact, if anything, it’s striking how much more lower-credit-score and lower-down-payment loans pay than others.”
The suggestion that the government is trying to spur borrowing among Black Americans echoes Republican talking points that the government caused the 2008 financial crisis by encouraging minority homeownership — a claim rejected by the Financial Crisis Inquiry Commission in 2011. (Federal data show that less than 5% of government-backed mortgages went to Black borrowers in 2021.)
“Republicans are just trying to play this because it’s always, to them, about playing off the rich against middle class and the poor and playing to race.”
– Sen. Sherrod Brown (D-Ohio)
The upfront mortgage fee is known as a loan-level pricing adjustment, and its cost is typically added to the loan by increasing its interest rate. The size of the fee is based on the borrower’s credit score and the size of their down payment for the mortgage.
Sandra Thompson, director of the Federal Housing Finance Agency, put out a forceful statement last week seeking to clear up a “fundamental misunderstanding” about the fees.
“Higher-credit-score borrowers are not being charged more so that lower-credit-score borrowers can pay less,” Thompson said in part. “The updated fees, as was true of the prior fees, generally increase as credit scores decrease for any given level of down payment.”
The FHFA oversees Fannie Mae and Freddie Mac, government-sponsored entities that buy mortgages from lenders in order to boost their liquidity and help them make more loans. Fannie and Freddie have been in government receivership since the 2008 financial crisis battered their balance sheets, and they instituted the loan-level price adjustments that year to help shore up their finances.
Thompson said the updated fees are part of a broader effort to improve the capitalization of the two entities, with an eye toward eventually restoring their independence, while still supporting the mission outlined in their congressional charters of promoting access to mortgage credit across the country, including to underserved areas. Other changes include higher fees for second homes and eliminating fees for first-time homebuyers with good credit but low incomes.
Rep. Patrick McHenry (R-N.C.), chair of the House Financial Services Committee, claimed in a letter to Thompson last week that the changes “violate the fundamental principle of risk-based pricing, namely that lower-risk borrowers should pay lower prices for access to credit than higher-risk borrowers.” He said Republicans would try to repeal the new fees if Thompson didn’t reverse course.
Industry groups have found themselves in an awkward position. The Mortgage Bankers Association, for instance, complained earlier this year that the higher fees would raise costs for borrowers at a difficult time for a housing market. But the group has sought to correct the misleading right-wing narrative about the fees.
“We’ve spent the past week responding to misinformation that spread from the media, to social media, to Capitol Hill on what the pricing framework means for borrowers,” MBA spokesman Adam DeSanctis said in a short video statement on Tuesday. “Borrowers with higher credit scores will still pay less than those with a lower credit score and the same down payment.”
Asked about the fact that low-credit borrowers still face higher fees, Sen. Marshall, the Kansas Republican who led his colleagues in a letter to Thompson, sidestepped the question, telling HuffPost that the FHFA had failed to follow administrative procedure rules for notifying the public about the policy and giving stakeholders a chance to weigh in.
“Their process is illegal,” Marshall said. “They didn’t go through any type of a comment period that this was an exact another executive order that didn’t go through regular order, so to speak.”
Marshall said he had heard a lot of negative feedback about the fees from the mortgage industry in Kansas. His letter asked Thompson to explain why there hadn’t been a formal notice and comment period.
Sen. Mike Rounds (R-S.D.), who signed the letter, insisted that the new fee schedule disadvantaged borrowers with good credit. But he said he wasn’t sure whether the previous fee schedule accurately reflected the risk of default posed by different types of mortgage borrowers.
“The question is, should you equalize it or should you have simply said the fee is the same regardless of if you have a high credit score or a low credit score,” Rounds said. (The new fee schedule reduces the difference between fees for low and high credit scores, but does not equalize them.)
Sen. Sherrod Brown (D-Ohio), chair of the Senate banking committee, told HuffPost that Republicans are “making up” a controversy over high-credit borrowers being punished.
“The fact is, if you put 20% down and you have a good credit score, you get a cheaper mortgage,” Brown said. “Republicans are just trying to play this because it’s always, to them, about playing off the rich against middle class and the poor and playing to race.”